Why Aren’t American workers earning more money? (It’s not because of a low minimum wage)

WageGraph

“Low wages are the most costly any employer can pay” – Henry Ford

At times like these, many are tempted to support a minimum wage increase.  The cost of living is increasing (mainly food prices), our economy is growing, yet wages for the lower middle class are stagnant and the upper middle class is shrinking.  A few wealthy people are reaping the benefits of global industrialization while the rest of us scrap to get by.  Hardly a day goes by that I don’t see a meme or a quote from the Sen. Bernie Sanders on the subject, and he means well in his efforts to raise the minimum wage.  This, however, treats the symptom rather than the cause.

Our stagnant wage growth in relation to the cost of living is caused by two factors:  “free trade” resulting in job outsourcing, and hidden inflation of the US Dollar.  Of these two causes, I find “free trade” to be the most serious.  This all started with Bush Sr. and Clinton…mostly Clinton.  They believed that if we signed “free trade” agreements with low wage countries such as Mexico, China, etc. that our hard manual labor based jobs would go to these countries, allowing highly educated American workers to focus on technology and high paying sectors with a high skill set.  This economic model has worked well for countries like Ireland, with its mere 4.5 million population.  The US, however, has a population of over 360 million, about 80 times the size of Ireland’s.  There is not enough demand for these high skill set products and services in the entire world to keep America employed.  Our tech sector does well, and does provide some excellent jobs, but it will never be enough.

Now some might say that if China, Mexico, etc. are cheaper, than why shouldn’t it be made there?  It benefits US because we get cheap stuff, right?  Well, let’s start with Mexico.  Jobs were sent to Mexico in the 1990s, and their economy grew.  We felt it, we lost SOME manufacturing jobs, but our economy grew none the less.  Jobs grew, wages grew, and many thought Clinton was a wonderful President because of this.  However, as Mexico’s economy grew, their wages grew also.  The eventual result probably would have been a level playing field between Mexico and the US.  As the supply of jobs in Mexico would have outgrown the demand for those jobs, companies would have had to pay Mexicans a fair wage or else lose them to other companies who would.  Which brings us to China.

The market forces that normally allow wages to increase…well these forces are suppressed in China.  If workers demand better wages, they turn up missing.  If they form labor unions, they are slaughtered.  If they work 80 hours, and only get paid for 50 hours, they file a complaint with their local government and such complaints are largely ignored.  Furthermore, China devalues their currency making their goods artificially cheap.  Even the Grandfather of Capitalism himself, Adam Smith, knew that free trade would only work if all nations involved had reliable currency values.  Yet our naïve (if not crooked) politicians tell us that “free trade” creates jobs for everyone, and is more efficient.  Meanwhile, our economy has plenty of minimum wage jobs, and jobs that pay $8 or $9 an hour, but many of us remember the 1990s when a reasonably skilled and intelligent college student could find a $10 hour part time jobs.  I have not adjusted for inflation here.  That was $10 an hour back when you could go to the grocery store and buy ground chuck for 99c a pound.  (Now you’re lucky to find it for under $4 a pound).

If we want wage growth, increasing the minimum wage will help very little.  Companies who hire the bare minimum of employees, such as Walmart, will be forced to pay a little more.  But smaller companies attempting to grow may find this burdensome and simply hire less new employees.  Furthermore, it doesn’t address the real problem.  We need a pragmatic trade and industrial strategy in the US if we want real wage growth.  We need a simpler, more sensible corporate tax code so that companies can pay a modest tax rate without having to hire a department of accountants and former bureaucrats to figure it out.  Companies who hire Americans should pay relatively low taxes, while companies who outsource and then import those products back to the US should bare a much larger portion of the tax burden.  Lower and simplify the corporate tax rate, and raise tariffs.  This will bring jobs back to America, and increase revenue, thereby lowering the US deficit.  Doing so will at least help to curb inflation, which is in reality much higher than we are told by the US Department of Labor.  If you really think inflation is less than 3% per year, think about that the next time you are buying groceries.

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2 thoughts on “Why Aren’t American workers earning more money? (It’s not because of a low minimum wage)

  1. First off,great article you make some great points.

    “The cost of living is increasing (mainly food prices), our economy is growing, yet wages for the lower middle class are stagnant and the upper middle class is shrinking.”

    This is definitely concerning. Now,on the beef with free trade.

    “This economic model has worked well for countries like Ireland, with its mere 4.5 million population. The US, however, has a population of over 360 million, about 80 times the size of Ireland’s. There is not enough demand for these high skill set products and services in the entire world to keep America employed. Our tech sector does well, and does provide some excellent jobs, but it will never be enough.”

    You’re right about the technology sector only holding so many jobs but there is another sector you’re forgetting to mention-the service sector(and no I am just talking about some low paid jobs at McDonald’s or Walmart(and people can move up in those companies as well)).

    http://www.cato.org/publications/commentary/congress-ignores-middleclass-service-sector

    “More than 80 percent of Americans earn their living in the service sector, including a broad swath of the middle class gainfully employed in education, health care, finance, and business and professional occupations.” (Congress Ignores Middle-Class Service Sector,Cato Institute).

    On another note, increasing or hiking tariffs in general might not be the best idea(yes perhaps there are specific circumstances we can debate about). For example,there could be growing U.S companies that purchase their equipment from other countries,this helps keep U.S competitors and competitive and savings could be used to support wages of domestic workers. Furthermore,the advent of free trade policies, and stores like WalMart helps make up for stagnant wages by providing affordable products that maximize limited purchasing power. Yes,trade has its negatives but it also has its positives.

    Meanwhile,protectionism might not be the best idea. Protectionism could be a form of economic mediocrity that clings to the past while crippling the economy by not moving forward towards the future. Yes,perhaps some sectors’ employment numbers will decline(such as how agricultural jobs were minimized with the invention of new technologies) but new opportunities will come-we just need to create an environment(i.e strong education systems and minimal taxes) that helps promote new growth and opportunities.

    “We need a simpler, more sensible corporate tax code so that companies can pay a modest tax rate without having to hire a department of accountants and former bureaucrats to figure it out. ”

    While we may agree to disagree on tariffs,we have common ground here,the U.S needs to have a competitive tax policy.

    “Companies who hire Americans should pay relatively low taxes…Lower and simplify the corporate tax rate”.

    These are great ideas,but hold the protectionist overtones. It’s one thing to support American business and workers but it’s another thing to close ourselves off from a changing world.

    I’d also like to add,that education is also very critical-having more students learning skills sets and graduating from college will help increase economic productivity and prepare the nation for globalization.

    Rather,than trying to insulate our nation for globalization,perhaps we should work to create an environment and provides the tools needed to help compete.

    Thank you for posting and have a wonderful week.

    • Thank you for the thoughtful comment, but I need to correct you on your main point of criticism. I am not a protectionist, but an advocate of trade balance. I have no desire to cut US off from trade, simply to have mutually beneficial trade agreements where imports and exports are relatively equal. So in other words, I’m all for lots of trade, as long as there is little to no trade deficit.

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